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2011-1685

  • Federal Register, Volume 76 Issue 23 (Thursday, February 3, 2011)[Federal Register Volume 76, Number 23 (Thursday, February 3, 2011)]

    [Proposed Rules]

    [Pages 6095-6110]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-1685]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 3, 32, 33, and 35

    Commodity Options and Agricultural Swaps

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is charged with proposing rules to implement new statutory

    provisions enacted by Title VII of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act

    provides that swaps in an agricultural commodity (as defined by the

    Commission) are prohibited unless entered into pursuant to a rule,

    regulation or order of the Commission adopted pursuant to Commodity

    Exchange Act (``CEA'' or ``Act''). The Dodd-Frank Act also includes

    options (other than an option on a futures contract) in its definition

    of swaps. Broadly speaking, the rules proposed herein would implement

    regulations whereby swaps in agricultural commodities and all commodity

    options (including options on both agricultural and non-agricultural

    commodities), other than options on futures, may transact subject to

    the same rules as all other swaps. The proposed rules for swaps in an

    agricultural commodity would repeal and replace the Commission's

    regulations concerning the exemption of swap agreements. Because the

    Dodd-Frank Act defines commodity options (other than options on

    futures) as swaps, the proposed rules for options would substantially

    amend the Commission's regulations regarding commodity option

    transactions. Also, current regulations on domestic exchange-traded

    commodity option transactions applies not only to exchange-traded

    options on futures (which are excluded from the Dodd-Frank definition

    of a swap), but also to exchange-traded options on physical commodities

    (which are within the Dodd-Frank swap definition). Therefore, the

    proposed rules would remove references to options on physical

    commodities from the Commission's regulations for exchange-traded

    options on futures.

    DATES: Written comments must be received on or before April 4, 2011.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD21,

    by any of the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's Regulations.\1\

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    \1\ 17 CFR 145.9. Unless otherwise indicated, the rules and

    regulations referenced in this notice are found in chapter 1 of

    title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et

    seq.

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    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

    Counsel, (202) 418-5041, dheitman@cftc.gov, or Ryne Miller, Attorney

    Advisor, (202) 418-5921, rmiller@cftc.gov, Division of Market

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act

    \3\ amended the CEA \4\ to establish a comprehensive new regulatory

    framework for swaps and security-based swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight.

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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \4\ 7 U.S.C. 1 et seq.

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    Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an

    agricultural commodity (as defined by the Commission) \5\ are

    prohibited unless entered into pursuant to a rule, regulation or order

    of the Commission adopted pursuant to CEA section 4(c).

    [[Page 6096]]

    Further, section 733 of the Dodd-Frank Act, new CEA section 5h(b)(2),

    provides that a swap execution facility (``SEF'') may not list for

    trading or confirm the execution of any swap in an agricultural

    commodity (as defined by the Commission) except pursuant to a rule or

    regulation of the Commission allowing the swap under such terms and

    conditions as the Commission shall prescribe.

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    \5\ As discussed below, in accordance with the mandate of the

    Dodd-Frank Act, the Commission has recently proposed a definition of

    the term ``agricultural commodity.'' See 75 FR 65586, Oct. 26, 2010.

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    In addition to the provisions on swaps in an agricultural

    commodity, the Dodd-Frank Act definition of ``swap'' includes options

    (other than options on futures). Section 721 of the Dodd-Frank Act adds

    new section 1a(47) to the CEA, defining ``swap'' to include not only

    ``any agreement, contract, or transaction commonly known as,'' among

    other things, ``an agricultural swap'' or ``a commodity swap,'' but

    also ``[an] option of any kind that is for the purchase or sale, or

    based on the value, of * * * commodities * * *.'' \6\ As a result of

    the Dodd-Frank changes, the Commission is issuing this notice

    proposing: (1) To withdraw and replace current part 35; \7\ (2) to

    substantially amend current part 32; \8\ (3) to withdraw rule 3.13,

    which will be rendered moot by the withdrawal of rule 32.13; and (4) to

    amend part 33 \9\ to remove references to options on physical

    commodities. As proposed, new part 35 and revised parts 32 and 33 will

    provide the regulatory authority under which market participants may

    enter into, respectively, swaps in an agricultural commodity

    (``agricultural swaps'') \10\ and commodity options.\11\

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    \6\ See new CEA section 1a(47), as added by section 721 of the

    Dodd-Frank Act. The Dodd-Frank swap definition excludes exchange-

    traded options on futures, but not exchange-traded options on

    physical commodities (see new CEA section 1a(47)(B)(i)).

    Accordingly, the Commission is amending part 33 of its regulations,

    ``Regulation of Domestic Exchange-Traded Commodity Option

    Transactions,'' to the extent that Part 33 applies to exchange-

    traded options on physical commodities, which are swaps under the

    Dodd-Frank definition. The rules proposed herein would remove any

    reference in part 33 to ``options on physicals,'' and such

    transactions would become subject to the regulations in revised part

    32, discussed below. Other options excluded from the definition of

    swap are options on any security, certificate of deposit, or group

    or index of securities, including any interest therein or based on

    the value thereof, that is subject to the Securities Act of 1933 and

    the Securities Exchange Act of 1934 (see new CEA section

    1a(47)(B)(iii)) and foreign currency options entered into on a

    national securities exchange registered pursuant to section 6(a) of

    the Securities Exchange Act of 1934 (see new CEA section

    1a(47)(B)(iv)).

    \7\ 17 CFR Part 35.

    \8\ 17 CFR Part 32.

    \9\ 17 CFR Part 33.

    \10\ When this notice refers to ``agricultural swaps,'' it is

    referring to swaps in an agricultural commodity, as identified in

    section 723(c)(3) of the Dodd-Frank Act.

    \11\ ``Commodity option'' and ``commodity option transaction''

    are defined in 17 CFR 1.3(hh). When this notice refers generally to

    ``commodity options'' or ``options,'' the terms will refer to all

    commodity options transactions other than those options on futures

    that are excluded from the Dodd-Frank definition of swap (see

    footnote 6, above).

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    To that end, this notice includes a background discussion of the

    statutory and regulatory framework governing agricultural swaps and

    commodity options. The notice also provides an overview and summary of

    the comments received on the Commission's Advanced Notice of Proposed

    Rulemaking regarding the agricultural swaps provisions in the Dodd-

    Frank Act.\12\ Finally, the notice includes an explanation of the

    rulemakings proposed herein, a discussion of CEA section 4(c) as the

    authority for the agricultural swaps aspect of this rulemaking, a

    request for comment on the proposed rulemaking, and a section

    addressing related matters.

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    \12\ See Agricultural Swaps, 75 FR 59666, Sept. 28, 2010.

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    II. Background

    A. Agricultural Swaps

    i. Pre Dodd-Frank

    Since 2000, bilateral swaps \13\ between certain sophisticated

    counterparties have been generally exempted from the Commission's

    jurisdiction pursuant to current CEA section 2(g),\14\ which was added

    to the CEA by the Commodity Futures Modernization Act of 2000

    (``CFMA'').\15\ However, current section 2(g) specifically excludes an

    ``agreement, contract, or transaction'' in an ``agricultural

    commodity'' from the CFMA swaps exemption.\16\

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    \13\ Prior to the Dodd-Frank Act, the Commission had defined a

    ``swap'' as follows: ``A swap is a privately negotiated exchange of

    one asset or cash flow for another asset or cash flow. In a

    commodity swap [including an agricultural swap], at least one of the

    assets or cash flows is related to the price of one or more

    commodities.'' (See 72 FR 66099, note 7, Nov. 27, 2007). As

    discussed above, see new CEA section 1a(47) for the statutory

    definition of a ``swap,'' as added to the CEA by section 721 of the

    Dodd-Frank Act.

    \14\ Current section 2(g) provides:

    No provision of this Act (other than section 5a (to the extent

    provided in section 5a(g)), 5b, 5d, or 12(e)(2)) shall apply to or

    govern any agreement, contract, or transaction in a commodity other

    than an agricultural commodity if the agreement, contract, or

    transaction is--

    (1) Entered into only between persons that are eligible contract

    participants at the time they enter into the agreement, contract, or

    transaction;

    (2) Subject to individual negotiation by the parties; and

    (3) Not executed or traded on a trading facility.

    CEA section 2(g).

    \15\ Current CEA section 2(g) was added to the CEA as section

    105(b) of the CFMA, enacted as Appendix E to Public Law 106-554.

    \16\ Notably, current CEA section 2(g) is not the only statutory

    provision added by the CFMA that excludes or exempts bilateral swaps

    between eligible contract participants from the Commission's

    jurisdiction. Current CEA section 2(d)(1) excludes any such

    bilateral ``agreement, contract, or transaction'' in excluded

    commodities from Commission jurisdiction, while CEA section 2(h)(1)

    creates a similar exemption for a ``contract, agreement or

    transaction'' in exempt commodities.

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    While the term ``agricultural commodity'' is not specifically

    defined in the Act,\17\ it is used in the Act in conjunction with the

    definition of the term ``exempt commodity,'' which is defined as

    neither an ``agricultural commodity'' nor an ``excluded commodity.''

    \18\ The effect of current CEA section 2(g) was that swaps involving

    exempt and excluded commodities were allowed to transact largely

    outside of the Commission's jurisdiction or oversight. And while the

    Dodd-Frank Act largely rewrites the world of law and regulation

    applicable to swaps in non-agricultural commodities,\19\ swaps

    involving agricultural commodities,\20\ including both the enumerated

    agricultural commodities and other non-enumerated agricultural

    commodities,\21\ remain subject to the Commission's pre-CFMA swaps

    regulations as set forth in part 35.\22\

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    \17\ Note that the Commission has proposed for comment a formal

    definition of agricultural commodity. See Agricultural Commodity

    Definition, 75 FR 65586, Oct. 26, 2010.

    \18\ ``The term `exempt commodity' means a commodity that is not

    an excluded commodity or an agricultural commodity.'' Current CEA

    section 1a(14). An ``excluded commodity'' is defined in current CEA

    section 1a(13) to include financial commodities such as interest

    rates, currencies, economic indexes, and other similar items.

    \19\ See Dodd-Frank non-agricultural swaps discussion, below.

    \20\ See 75 FR 59666, at 59667, Sept. 28, 2010, for an

    explanation of the legislative history discussing ``agricultural

    commodity'' as used in CEA section 2(g).

    \21\ ``Enumerated agricultural commodities'' typically refers to

    the list of commodities specifically enumerated in the CEA

    definition of ``commodity'' at current CEA Section 1a(4) (renumbered

    as section 1a(9) under Dodd-Frank): Wheat, cotton, rice, corn, oats,

    barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs,

    Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils

    (including lard, tallow, cottonseed oil, peanut oil, soybean oil,

    and all other fats and oils), cottonseed meal, cottonseed, peanuts,

    soybeans, soybean meal, livestock, livestock products, and frozen

    concentrated orange juice (but not onions).

    \22\ 17 CFR Part 35 remains in effect for agricultural swaps

    because it was originally adopted under the Commission's CEA section

    4(c) exemptive authority, and section 723(c)(3)(B) of the Dodd-Frank

    Act grandfathers existing 4(c) exemptions in the context of

    agricultural swaps.

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    Part 35 provides a broad exemption for certain swap agreements. As

    noted, part 35 originally applied to swaps in all

    [[Page 6097]]

    commodities.\23\ After the CFMA amendments to the CEA, which

    statutorily exempted swaps on ``exempt'' and ``excluded'' commodities

    from virtually all of the Commission's jurisdiction, part 35 remained

    relevant only for agricultural swaps. With the exception of three

    outstanding exemptive orders related to cleared agricultural basis and

    calendar swaps \24\ (which exempt certain swaps transactions from part

    35's non-fungibility and counterparty creditworthiness requirements),

    part 35 is the sole existing authority under which market participants

    may transact agricultural swaps that are not options.\25\

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    \23\ Part 35 provides eligible swap participants (as defined in

    Sec. 35.1(b)(2)) with a general exemption from the CEA for a swap

    that is not part of a fungible class of agreements that are

    standardized as to their material economic terms, where the

    creditworthiness of each counterparty is a material consideration in

    entering into or determining the terms of the swap, and the swap is

    not entered into and traded on or through a multilateral transaction

    execution facility. See Sec. 35.2.

    \24\ Part 35, at Sec. 35.2(d), also provides that ``any person

    may apply to the Commission for exemption from any of the provisions

    of the Act (except 2(a)(1)(B) [liability of principal for act of

    agent]) for other arrangements or facilities, on such terms and

    conditions as the Commission deems appropriate, including but not

    limited to, the applicability of other regulatory regimes.'' See 17

    CFR 35.2(d). The Commission has granted three such exemptions, which

    have in each instance been styled as exemptive orders pursuant to

    CEA section 4(c). See,

    Order (1) Pursuant to Section 4(c) of the Commodity Exchange Act

    (a) Permitting Eligible Swap Participants To Submit for Clearing and

    ICE Clear U.S., Inc. and Futures Commission Merchants To Clear

    Certain Over-The-Counter Agricultural Swaps and (b) Determining

    Certain Floor Brokers and Traders To Be Eligible Swap Participants;

    and (2) Pursuant to Section 4d of the Commodity Exchange Act,

    Permitting Certain Customer Positions in the Foregoing Swaps and

    Associated Property To Be Commingled With Other Property Held in

    Segregated Accounts, 73 FR 77015, Dec. 18, 2008;

    Order (1) Pursuant to Section 4(c) of the Commodity Exchange

    Act, Permitting the Chicago Mercantile Exchange to Clear Certain

    Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d

    of the Commodity Exchange Act, Permitting Customer Positions in Such

    Cleared-Only Contracts and Associated Funds To Be Commingled With

    Other Positions and Funds Held in Customer Segregated Accounts, 74

    FR 12316, Mar. 24, 2009; and

    Order (1) Pursuant to Section 4(c) of the Commodity Exchange

    Act, Permitting the Kansas City Board of Trade Clearing Corporation

    To Clear Over-the-Counter Wheat Calendar Swaps and (2) Pursuant to

    Section 4d of the Commodity Exchange Act, Permitting Customer

    Positions in Such Cleared-Only Swaps and Associated Funds To Be

    Commingled With Other Positions and Funds Held in Customer

    Segregated Accounts, 75 FR 34983, June 21, 2010.

    \25\ Options on agricultural commodities are reviewed in detail

    in the options discussion of this notice.

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    ii. Dodd-Frank Swaps Provisions

    a. Non-Agricultural Swaps

    Under the CEA, as amended by the Dodd-Frank Act, only eligible

    contract participants (``ECPs'') \26\ may enter into a swap, unless

    such swap is entered into on a designated contract market

    (``DCM''),\27\ in which case any person may enter into the swap.\28\

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    \26\ ``Eligible contract participant'' is defined in current CEA

    section 1a(12). Generally speaking, an eligible contract participant

    is considered to be a sophisticated investor.

    \27\ A designated contract market is a board of trade designated

    as a contract market under CEA section 5.

    \28\ See new CEA section 2(e) as added by section 723(a)(2) of

    the Dodd-Frank Act.

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    New CEA section 2(h), as added by section 723(a)(3) of the Dodd-

    Frank Act, establishes a clearing requirement for swaps. Under that

    subsection, the Commission would determine, based on factors listed in

    the statute, whether a swap, or a group, category, type, or class of

    swaps, should be required to be cleared. A swap that is required to be

    cleared must be executed on a DCM or a SEF,\29\ if a DCM or SEF makes

    the swap available for trading. Swaps that are not required to be

    cleared may be executed bilaterally. Notwithstanding the above, a swap

    entered into by a commercial end user \30\ is not subject to the

    mandatory clearing requirement; however an end user may opt to submit

    the swap for clearing.

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    \29\ The requirements for SEFs are set forth in new CEA section

    5h.

    \30\ Generally, a commercial end user is described in new CEA

    section 2(h)(7) as a non-financial entity that is using swaps to

    hedge or mitigate commercial risk and that notifies the Commission

    as to how it generally meets its financial obligations associated

    with entering into non-cleared swaps.

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    Section 731 of the Dodd-Frank Act adds a new section 4s to the CEA

    that provides for the registration and regulation of swap dealers and

    major swap participants.\31\ The new requirements for swap dealers and

    major swap participants include, in part, capital and margin

    requirements, business conduct standards, and reporting, recordkeeping,

    and documentation requirements.

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    \31\ ``Swap dealer'' is defined in new CEA section 1a(49), as

    added by section 721(a)(21) of the Dodd-Frank Act. ``Major swap

    participant'' is defined in new CEA section 1a(33), as added by

    section 721(a)(16) of the Dodd-Frank Act.

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    Section 737 of the Dodd-Frank Act amends current CEA section 4a

    regarding position limits. Under the Dodd-Frank provisions and amended

    CEA section 4a, the Commission is directed to adopt position limits for

    futures and options traded on or subject to the rules of a designated

    contract market, and swaps that are economically equivalent to such

    futures and exchange-traded options for both exempt and agricultural

    commodities.

    b. Agricultural Swaps

    As noted above, under section 723(c)(3) of the Dodd-Frank Act,

    swaps in an ``agricultural commodity'' (as defined by the Commission)

    \32\ are prohibited unless the swap is entered into pursuant to an

    exemption granted under CEA section 4(c). The requirements of section

    4(c) are discussed in greater detail, below.\33\

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    \32\ See proposed definition of agricultural commodity at 75 FR

    65586, Oct. 26, 2010.

    \33\ Generally speaking, section 4(c) provides that, in order to

    grant an exemption, the Commission must determine that: (1) The

    exemption would be consistent with the public interest and the

    purposes of the CEA; (2) any agreement, contract, or transaction

    affected by the exemption would be entered into by ``appropriate

    persons'' as defined in section 4(c); and (3) any agreement,

    contract, or transaction affected by the exemption would not have a

    material adverse effect on the ability of the Commission or any

    contract market to discharge its regulatory or self-regulatory

    duties under the CEA.

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    Dodd-Frank section 723(c)(3)(B) includes a ``grandfather'' clause

    providing that any rule, regulation, or order regarding agricultural

    swaps that was issued pursuant to the Commission's exemptive authority

    in CEA section 4(c), and that was in effect on the date of enactment of

    the Dodd-Frank Act, would continue to be permitted under such terms and

    conditions as the Commission may prescribe. Such rules, regulations or

    orders would include part 35 with respect to agricultural swaps and the

    agricultural basis and calendar swaps noted above, but would not

    include options entered into pursuant to part 32.\34\

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    \34\ Part 32 was not issued pursuant to the Commission's section

    4(c) exemptive authority and thus does not qualify for the Dodd-

    Frank grandfather provision for existing 4(c) exemptions. See

    section 723(c)(3)(B) of the Dodd-Frank Act.

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    In addition to the provisions in section 723(c)(3), section 733 of

    the Dodd-Frank Act, new CEA section 5h(b), provides that a SEF may not

    list for trading or confirm the execution of any swap in an

    agricultural commodity (as defined by the Commission) except pursuant

    to a rule or regulation of the Commission allowing the swap under such

    terms and conditions as the Commission shall prescribe.

    B. Commodity Options

    i. Commodity Options Are Swaps

    The Dodd-Frank Act defines the term ``swap'' to include not only

    the various types of swaps listed in the definition, including

    commodity swaps and agricultural swaps, but also options of any kind

    (other than options on

    [[Page 6098]]

    futures).\35\ Even before the Dodd-Frank Act, commodity options have

    been subject to the Commission's plenary authority under CEA section

    4c(b).\36\ Based on that general prohibition of any option transactions

    contrary to any Commission rule, regulation or order prohibiting

    options, or allowing them under such conditions as the Commission may

    prescribe, the only options currently authorized under the CEA are

    those specifically provided for in the Commission's regulations.

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    \35\ See new CEA section 1a(47)(B), as added to the CEA by

    section 721 of the Dodd-Frank Act. But see also footnote 6, above,

    for the list of certain options that are excluded from the swap

    definition.

    \36\ Section 4c(b) provides:

    No person shall offer to enter into, enter into or confirm the

    execution of, any transaction involving any commodity regulated

    under this Act which is of the character of, or is commonly known to

    the trade as, an ``option'', ``privilege'', ``indemnity'', ``bid'',

    ``offer'', ``put'', ``call'', ``advance guaranty'', or ``decline

    guaranty'', contrary to any rule, regulation, or order of the

    Commission prohibiting any such transaction or allowing any such

    transaction under such terms and conditions as the Commission shall

    prescribe. Any such order, rule, or regulation may be made only

    after notice and opportunity for hearing, and the Commission may set

    different terms and conditions for different markets. CEA section

    4c(b); 7 U.S.C. 6c(b).

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    ii. Options on Agricultural Commodities; Trade Options

    As noted above, the Commission maintains plenary authority over

    options and has used that authority to, among other things, issue part

    32 of the Commission's regulations. Part 32 includes a general ban on

    commodity options,\37\ but allows for commodity option transactions

    under certain conditions. Part 32 specifically allows for options on

    agricultural commodities in two instances.\38\

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    \37\ See Commission regulation 32.11, 17 CFR 32.11.

    \38\ Note that part 32 was not issued under the Commission's

    section 4(c) exemptive authority. After the effective date of the

    Dodd-Frank Act, options on agricultural commodities will also fall

    under the Dodd-Frank Act's provisions governing the trading of swaps

    (and, specifically, agricultural swaps) since options on commodities

    fall within the Act's definition of a swap. Accordingly, it is

    important to identify which options on agricultural commodities are

    currently being traded pursuant to part 32 and, where appropriate,

    to implement rules to preserve that market (in addition to rules

    proposed herein that will preserve the majority of the existing non-

    agricultural trade option market, subject to the same laws and rules

    as all other swaps).

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    First, rule 32.13 establishes rules for trading bilateral options

    on the ``enumerated'' agricultural commodities (``agricultural trade

    options'' or ``ATOs'') whereby ATOs may only be sold by an Agricultural

    Trade Option Merchant (``ATOM''), who must first register with the

    Commission as such pursuant to CFTC rule 3.13. Since its 1998 adoption

    and one amendment in 1999,\39\ the ATOM registration scheme has

    attracted only one registrant, which registrant has since withdrawn its

    ATOM registration. Accordingly, ATOs currently may only be transacted

    pursuant to an exemptive provision found at Sec. 32.13(g)(1). The

    exemption at Sec. 32.13(g)(1) allows ATOs to be sold when: (1) The

    option is offered to a commercial (``a producer, processor, or

    commercial user of, or a merchant handling'' the underlying commodity);

    (2) the commercial enters the transaction solely for purposes related

    to its business as such; and (3) each party to the option contract has

    a net worth of not less than $10 million.

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    \39\ 63 FR 18821, Apr. 16, 1998; and 64 FR 68011, Dec. 6, 1999,

    respectively.

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    In either case (whether transacted pursuant to the ATOM

    registration scheme or accomplished via the exemption at Sec.

    32.13(g)), the phrase ``agricultural trade option'' refers specifically

    to a trade option on an agricultural commodity enumerated in Sec.

    32.2.

    In addition to the ATO rules in Sec. 32.13, part 32 includes, at

    Sec. 32.4, a basic trade option exemption applicable to options on

    commodities other than the enumerated agricultural commodities. The

    terms of the Sec. 32.4 exemption are essentially the same as those of

    the Sec. 32.13(g) exemption with one significant difference--the Sec.

    32.4 trade option exemption does not include any net worth requirement.

    Under Sec. 32.4, the option must be offered to a producer, processor,

    or commercial user of, or a merchant handling, the commodity, who

    enters into the commodity option transaction solely for purposes

    related to its business as such.

    Because the term ``agricultural commodity'' as used in section

    723(c)(3) of the Dodd-Frank Act refers to more than just the enumerated

    commodities, the Commission recognizes that certain options authorized

    under Sec. 32.4 (e.g. options on coffee, sugar, cocoa, and other

    agricultural products that do not appear in the enumerated commodity

    list) would be considered options on an agricultural commodity. As

    such, and without adopting the rules proposed herein, those options

    would be swaps on an agricultural commodity and would thereby fall

    under the Dodd-Frank Act's general prohibition of agricultural swaps.

    iii. Remainder of Part 32

    In addition to the foregoing provisions regarding Sec. 32.13

    agricultural trade options and Sec. 32.4 general trade options, part

    32 contains various other provisions that have been rendered obsolete,

    either by the Dodd-Frank Act, by subsequent Commission rulemaking

    actions, or by the passage of time. The amendments proposed herein

    would substantially update and revise part 32 and remove these

    unnecessary provisions.

    iv. Part 33

    As noted above, current part 33 applies to both exchange-traded

    options on futures and exchange-traded options on physical commodities.

    However, Dodd-Frank exempts only options on futures from the swaps

    definition. Therefore, options on physical commodities, even if traded

    on a DCM, are to be regulated as swaps. Accordingly, these proposed

    rules would remove all references to exchange-traded options on

    physicals from part 33.

    III. The ANPRM

    A. General Description of the ANPRM

    On September 28, 2010 (75 FR 59666), the Commission published an

    advanced notice of proposed rulemaking (``ANPRM'') and request for

    comment on the appropriate conditions, restrictions or protections to

    be included in any rule, regulation or order of the Commission adopted

    pursuant to section 4(c) of the Act governing the trading of swaps in

    an ``agricultural commodity,'' \40\ as defined by the Commission.\41\

    The Commission requested specific input pertaining to five topics:

    Current Agricultural Swaps Business (overall size, the types of

    entities, and any unique characteristics of agricultural swaps that

    distinguish them from other types of physical commodity swaps);

    Agricultural Swaps Clearing (the extent to which existing swaps are

    cleared or uncleared, whether existing swaps would generally qualify

    for a commercial end-user exemption, and the desirability of a clearing

    requirement for swaps that do not qualify for such an exemption);

    Trading (description of any significant trading problems encountered in

    this market); Agricultural Swaps Purchasers (whether agricultural swaps

    participants need

    [[Page 6099]]

    more protections than other physical commodity swaps participants, or

    whether special provisions are needed to make it easier for producers

    to participate); Designated Contract Markets (should agricultural swaps

    be permitted on DCMs to the same extent as other swaps); Swap Execution

    Facilities (should agricultural swaps be permitted on SEFs to the same

    extent as other swaps); and Trading Outside of DCMs and SEFs (should

    agricultural swaps be permitted to trade outside of a DCM or SEF to the

    same extent as other swaps, and generally should agricultural swaps be

    treated any differently than other types of physical commodity swaps).

    ---------------------------------------------------------------------------

    \40\ The Commission also informally solicited comments on its

    Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_19_AgSwaps.html. In addition, Commission staff has met with market

    participants and other interested parties. A complete list of

    external meetings held at the Commission may be found on the

    Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.

    \41\ The Commission has published for comment a proposed

    regulatory definition of the term, ``agricultural commodity'' (See:

    75 FR 65586, Oct. 26, 2010, and plans to publish a final definition

    in the near future.

    ---------------------------------------------------------------------------

    B. Summary of Comments

    Nineteen formal comment letters representing a broad range of

    interests, including producers, merchants, swap dealers, commodity

    funds, futures industry organizations, and academics/think tanks,

    responded to the ANPRM. In particular, comment letters were received

    from: The American Farm Bureau Federation, the American Soybean

    Association, the Commodity Markets Council, the National Association of

    Wheat Growers, the National Cattlemen's Beef Association, and the

    National Corn Growers Association, who filed a joint statement

    (collectively, ``the Ag Associations''); the National Grain and Feed

    Association (``NGFA''); the Commodity Markets Council (``CMC,'' which

    filed a separate letter in addition to signing onto the joint statement

    noted above); the National Milk Producers Federation (``NMPF''); the

    Dairy Farmers of America (``DFA''); the National Council of Farmer

    Cooperatives (``NCFC''); the Gavilon Group, LLC (``Gavilon''), a feed

    manufacturer; Cargill, an agricultural commodities merchant; Allenberg

    Cotton, a cotton merchant; the Agricultural Commodity Swaps Working

    Group (``Ag Swap Working Group''), comprised of financial institutions

    that provide risk management and investment products to agricultural

    end users; the International Swaps and Derivatives Association

    (``ISDA''); United States Commodity Funds (``USCF''); the Alternative

    Investment Management Association, Ltd. (``AIMA''); International

    Assets Holding Corporation (``IAHC''); Teucrium Trading; the Futures

    Industry Association (``FIA''); the CME Group, Inc. (``CME''); the

    Institute for Agriculture and Trade Policy (``IATP''); and Dr. Robert

    Pollin, a university professor.\42\

    ---------------------------------------------------------------------------

    \42\ In addition, two comments were received that did not

    directly address the ANPRM.

    ---------------------------------------------------------------------------

    The vast majority of commenters supported the equal treatment of

    agricultural swaps (including trade options) under the same regulatory

    scheme as other categories of swaps. The following statement from the

    Ag Associations is representative of this sentiment:

    Ag swaps are used, to varying degrees, by our members because

    they provide a targeted, customized, cost-effective, and efficient

    risk management strategy * * * In a world with increasing inherent

    volatility, the need for risk management instruments has never been

    greater.

    We urge the Commission to treat swaps for all commodities

    harmoniously. We believe the comprehensive regulation of swaps

    should not be based on distinctions among commodity types. The

    generally applicable protections under the Dodd-Frank Bill--such as

    reporting, mandatory clearing, mandatory trading of standardized

    swaps, minimum capital requirements, and the CFTC's authority to

    impose position limits, determine which swaps are subject to

    clearing and trading and to exercise emergency powers--will protect

    ag swaps from fraud and manipulation.

    Two commenters (Dr. Pollin and the IATP) were generally opposed to

    the trading of agricultural swaps under the same conditions as other

    physical commodity swaps. Both commenters expressed the belief that

    speculative investment in agricultural derivatives has increased price

    volatility, to the detriment of producers and consumers of agricultural

    products, and that trading in agricultural swaps could potentially

    exacerbate this problem.

    Commenters offered the following specific information and/or

    individual perspectives on the five topic areas outlined above:

    Current Agricultural Swaps Business. Regarding the state of the

    current agricultural swaps business (including trade options),

    commenters generally noted that agricultural swaps are used to a

    considerable extent, but they were unable to quantify the overall size

    of this market. Swap participants include commercial end users

    (producers, processors and merchants), hedge funds, swap dealers, and

    financial institutions. Generally, commenters did not believe that the

    characteristics of agricultural swaps were significantly different from

    the characteristics of other types of physical commodity swaps.

    Agricultural Swaps Clearing. According to the commenters, most

    agricultural swap activity (including trade options) is not cleared

    (for example, the NCFC estimated that less than one percent of its

    members' swaps are cleared). Several commenters pointed to the small

    amount of swaps cleared by DCOs under existing 4(c) exemptions,

    relative to the presumed size of the market, as evidence of how few

    swaps are cleared. Commenters representing agricultural producers and

    merchants indicated that virtually all of their swaps would qualify for

    the end-user exemption from the mandatory clearing requirement of the

    Dodd-Frank Act. Furthermore, most commenters suggested that

    agricultural swaps should be individually scrutinized as to their

    clearability, rather than subjecting all agricultural swaps to a

    clearing requirement. (NCFC, for example, observed that, ``the low

    volume, small sizes and odd lots [of many agricultural swaps] would not

    be attractive for exchanges or clearing houses to offer those specific

    products.'' Thus, ``if all entities are required to clear agricultural

    swaps through an exchange or standardize a non-standard transaction

    (both in terms of quantity and structure), costs would likely increase

    to a point where the use of swaps as a bona fide hedge/risk management

    tool would not be available to segments of the agricultural

    marketplace.'') IATP, however, supported mandatory clearing for all

    agricultural swaps as a means of discouraging producers from

    participating directly in this market.

    Trading Practices and Issues. Commenters generally were not aware

    of any specific problems pertaining to the existing trade in

    agricultural swaps and most saw no need for additional requirements for

    trading agricultural swaps relative to other types of swaps. Some

    commenters did observe that the Commission's existing regulatory

    requirements governing agricultural trade options in the enumerated

    agricultural commodities (as distinct from other types of physical

    commodities) have restricted the development of this market to the

    detriment of commercial end users (see, for example, comments by CMC,

    Gavilon and DFA).

    Additional Protections for Agricultural Swaps Purchasers. Most

    commenters did not believe that agricultural swaps participants need

    more protection than participants in other types of commodity swaps.

    Most commenters also believed that the Dodd-Frank Act requirement,

    limiting swap purchasers to ``eligible contract participants''

    (``ECPs''), is appropriate to apply to the purchasers of agricultural

    commodity swaps. However, several commenters suggested that

    transactions within farmer cooperatives (that is,

    [[Page 6100]]

    between individual farmer members and their local elevator cooperative,

    and between affiliated cooperatives at the local, regional or national

    levels) should not be subject to the ECP requirement (for example, the

    NCFC states that individual members who do not meet the ECP requirement

    should be permitted to purchase swaps directly from their producer

    cooperatives, and the NMPF argues that transactions between members and

    their cooperatives are internal transactions and should be treated as

    such, rather than be subject to provisions that govern transactions

    between unaffiliated parties). In addition, one commenter favored

    making agricultural trade options (but not other types of swaps)

    available from registered swap dealers to non-ECPs who enter into them

    explicitly for commercial risk management purposes (see Cargill

    comment).

    Trading on DCMs and SEFs. Commenters generally supported the

    listing and trading of agricultural swaps (including options) on DCMs

    and SEFs to the same extent as other physical commodity swaps, with the

    exception of Dr. Pollin and the IATP.

    Trading off of DCMs and SEFs. Commenters generally expressed the

    opinion that agricultural swaps (including options) should be permitted

    to trade outside of DCMs and SEFs under the same conditions that apply

    to other types of physical commodity swaps (again, with the exception

    of the IATP and Dr. Pollin). Most commenters did not believe there were

    any specific agricultural commodities that would require special or

    different protections. IATP expressed the opinion that ``A higher

    collateral and capital requirement should be applied to any bilateral

    swaps a CFTC rule would allow.'' Dr. Pollin argued that there is no

    good reason for offering any exemptions from the blanket prohibition on

    agricultural swaps contained in the Dodd-Frank Act.

    In addition to comments addressing the five specific topic areas

    directly related to the ANPRM, several commenters requested that the

    Commission provide clarity on the treatment of certain types of swap

    participants and transactions within the overall regulatory scheme for

    swaps. In this regard, several commenters requested that the Commission

    clarify that agricultural producer cooperatives that enter into swaps

    with their own members or third parties in the course of marketing

    their members' agricultural products should be considered to be end

    users for purposes of the clearing exception, and further that the

    Commission should clarify that producer cooperatives are excluded from

    the definitions of swap dealer and major swap participant (see, for

    example, comments from NGFA, NCFC, NMPF, and DFA). These issues are

    beyond the scope of this proposed rulemaking. The Commission has issued

    proposed rules regarding: (1) The end-user exception to mandatory

    clearing of swaps pursuant to Sec. 723 of the Dodd-Frank Act; \43\ and

    (2) further definition of certain terms regarding market participants,

    including the terms ``swap dealer'' and ``major swap participant,''

    pursuant to Sec. 712(d) of the Dodd-Frank Act.\44\ The Commission

    encourages all interested parties to submit comments addressing these

    proposed rules, including responses to the requests for comment set

    forth therein.

    ---------------------------------------------------------------------------

    \43\ See: End User Exception to Mandatory Clearing of Swaps, 75

    FR 80747, Dec. 23, 2010 (comment period closes February 22, 2011).

    \44\ See: Further Definition of ``Swap Dealer,'' ``Security-

    Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-

    Based Swap Participant'' and ``Eligible Contract Participant,'' 75

    FR 80174, Dec. 21, 2010 (joint rulemaking with Securities and

    Exchange Commission (``SEC''), comment period closes February 22,

    2011).

    ---------------------------------------------------------------------------

    Some commenters also requested that the Commission clarify that

    certain types of transactions (embedded options in forward contracts

    \45\ and book-outs \46\) fall within the definition of an excluded

    forward contract rather than the definition of a swap. These issues,

    too, are beyond the scope of this proposed rulemaking. Commission

    staff, jointly with staff of the SEC, is also considering further

    definition of terms regarding certain products, including the term

    ``swap,'' pursuant to Sec. 712(d) of the Dodd-Frank Act. Any comment

    addressing the distinction between swaps and forward contracts will be

    shared with appropriate staff.

    ---------------------------------------------------------------------------

    \45\ See: Characteristics Distinguishing Cash and Forward

    Contracts and ``Trade'' Options, Interpretive Statement of the

    Commission's General Counsel, 50 FR 39656, Sept. 30, 1985, regarding

    the differences between forward contracts and options.

    \46\ A book-out is a separate, subsequent agreement whereby two

    commercial parties to a forward contract, who find themselves in a

    delivery chain or circle at the same delivery point, can agree to

    settle (or ``book-out'') their delivery obligations by exchanging a

    net payment. See: Statutory Interpretation Regarding Forward

    Transactions, 55 FR 39188, Sept. 25, 1990.

    ---------------------------------------------------------------------------

    IV. Explanation of the Proposed Rules

    A. Introduction

    After considering the complete record in this matter, including all

    comments on the ANPRM, the Commission is proposing the rulemaking

    contained herein. Broadly speaking, the proposed rules would implement

    regulations whereby (1) swaps in agricultural commodities, and (2) all

    commodity options (including options on both agricultural and non-

    agricultural commodities), other than options on futures, may transact

    subject to the same rules as all other swaps.

    First, the proposal would withdraw existing part 35 of the

    Commission's regulations--thus withdrawing the provisions originally

    adopted in 1993 to provide legal certainty for the bilateral swaps

    market by largely exempting bilateral swaps transactions from CEA

    regulation.\47\ Second, pursuant to the exemptive authority in CEA

    section 4(c), the proposed rules would adopt a new part 35 to provide

    the primary authority for transacting swaps in an agricultural

    commodity (``agricultural swaps'') as authorized by Sections 723(c)(3)

    and 733 of the Dodd-Frank Act. Third, the proposed rulemaking would

    substantially update and revise the existing framework for off-exchange

    options in existing part 32. In part pursuant to the exemptive

    authority in CEA section 4(c) and in part pursuant to the Commission's

    general rulemaking authority set out at CEA section 8a(5) and the

    Commission's plenary authority over options, revised part 32 would

    affirm that all commodity options (other than options on futures) are

    swaps, and as such will be subject to all provisions of the CEA

    otherwise applicable to swaps, including any rule, regulation, or order

    thereunder. The proposed rulemaking would also withdraw rule 3.13,

    which sets out procedures for the registration of agricultural trade

    option merchants and their associated persons. Rule 3.13 will become

    moot upon the withdrawal of rule 32.13, which includes the underlying

    registration requirement. Finally, the proposed rules would revise part

    33 to delete references to exchange-traded options on physical

    commodities (which will now be regulated as swaps), leaving only

    exchange-traded options on futures subject to part 33.

    ---------------------------------------------------------------------------

    \47\ ``[Part 35 * * *] exempt[s] swap agreements (as defined

    herein) meeting specified criteria from regulation under the

    Commodity Exchange Act (the ``Act''). This rule was proposed

    pursuant to authority recently granted the Commission, a purpose of

    which is to give the Commission a means of improving the legal

    certainty of the market for swaps agreements.'' 58 FR 5587, Jan. 22,

    1993.

    ---------------------------------------------------------------------------

    B. Withdrawal of Current Part 35

    In enacting the Futures Trading Practices Act of 1992 (the ``1992

    Act''),\48\ Congress added section 4(c) to the CEA and authorized the

    Commission, by rule, regulation, or order, to exempt any agreement,

    contract or transaction, or class thereof, from the exchange-trading

    [[Page 6101]]

    requirement of CEA section 4(a), or (with minor exceptions not relevant

    here) from any other provision of the Act.\49\ Pursuant to its new

    authority in section 4(c), the Commission proposed in 1992 \50\ and

    adopted in 1993 \51\ part 35 of the Commission's regulations, generally

    exempting certain swap agreements from the CEA. As explained above,

    part 35 originally applied to all commodities. However, certain

    amendments to the CEA made by the CFMA had the effect of making part 35

    relevant only for swaps in agricultural commodities.

    ---------------------------------------------------------------------------

    \48\ Public Law 102-546 (Oct. 28, 1992).

    \49\ While section 4(c) was amended by the Dodd-Frank Act, for

    the purposes of this rulemaking its function and effect have not

    changed. See 4(c) discussion, below.

    \50\ See the original proposal at 57 FR 53627, Nov. 12, 1992.

    See also 57 FR 58423, Dec. 28, 1992, extending the comment period

    for an additional fourteen days.

    \51\ 58 FR 5587, Jan. 22, 1993.

    ---------------------------------------------------------------------------

    The Dodd-Frank Act amends, repeals, or replaces many CEA sections

    added by the CFMA (including the statutory exemptions for swaps in

    excluded and exempt commodities at current CEA sections 2(d), 2(g), and

    2(h)). To avoid any uncertainty as to whether the Commission will allow

    bilateral swaps in non-agricultural commodities to revert to reliance

    on existing part 35 for exemption from the CEA and the Dodd-Frank

    amendments, the Commission is proposing to revoke current part 35 in

    its entirety. Once part 35 is revoked, the only swaps authorized under

    the CEA or the Commission's rules will be those swaps that comport with

    the requirements of the CEA, as amended by the Dodd-Frank Act.\52\

    ---------------------------------------------------------------------------

    \52\ Section 723(c)(3)(B) of the Dodd-Frank Act grandfathers

    existing 4(c) orders that relate to agricultural swaps unless

    superseded by subsequent Commission order. This notice of proposed

    rulemaking is not taking any action to alter the continued

    effectiveness of the orders identified in footnote 24 above. See

    also, 76 FR [ ---------- ] n. 38Jan. 20, 2011.

    ---------------------------------------------------------------------------

    C. Proposed New Part 35

    The provisions of proposed new part 35 would generally provide that

    agricultural swaps may be transacted subject to all provisions of the

    CEA, and any Commission rule, regulation or order thereunder, that is

    otherwise applicable to swaps. New part 35 would also clarify that by

    issuing a rule allowing agricultural swaps to transact subject to the

    laws and rules applicable to all other swaps, the Commission is

    allowing agricultural swaps to transact on DCMs, SEFs, or otherwise to

    the same extent that all other swaps are allowed to trade on DCMs,

    SEFs, or otherwise.

    D. Revisions to Part 32

    Because commodity options (other than options on futures) clearly

    fall within the Dodd-Frank Act definition of swap,\53\ the Commission

    is proposing to substantially update and revise the now duplicative

    off-exchange commodity option regulations set forth in current part 32.

    Revised part 32, authorized by the Commission's plenary options

    authority, will provide legal certainty for the commodity options

    market by making it clear that commodity options (other than options on

    futures) are authorized to continue subject to all provisions of the

    CEA, and any rule, regulation, or order thereunder, that is otherwise

    applicable to swaps.

    ---------------------------------------------------------------------------

    \53\ See footnote 6 above.

    ---------------------------------------------------------------------------

    In order to support the revisions to part 32, including the

    withdrawal of several sections in their entirety, the Commission

    reviewed and analyzed each provision of existing part 32, including the

    corresponding history of the Commission's development of commodity

    options regulation. Based on its review, the Commission has determined

    that there would be little practical effect and no detrimental

    consequences in adopting the proposed revisions to the existing

    commodity options regime in part 32.

    i. 1978 Suspension of Commodity Options (Sec. 32.11)

    From a historical perspective, the Commission adopted its first

    broad anti-fraud rule applicable to commodity options transactions on

    June 24, 1975.\54\ After an unsuccessful effort to generally permit

    off-exchange commodity options subject to certain rules and regulations

    (that is, original part 32),\55\ the Commission issued a general

    suspension of commodity options transactions in 1978.\56\ The

    suspension was adopted by the Commission on April 17, 1978 and was

    added to the original part 32 as Sec. 32.11.\57\ Upon its adoption in

    1978, Sec. 32.11 suspended all commodity option transactions (except

    for those trade options authorized by Sec. 32.4) \58\ that had been

    otherwise authorized by original part 32. Aside from later amendments

    that authorized commodity options conducted on or subject to the rules

    of a contract market \59\ or a foreign board of trade,\60\ current

    Sec. 32.11 remains in the same form as when originally adopted in

    1978. Accordingly, the bulk of original part 32, as discussed below,

    has been obsolete and/or irrelevant since the adoption of Sec. 32.11

    in 1978. This includes the registration requirements in Sec. 32.3, the

    disclosure requirements in Sec. 32.5, the segregation requirements in

    Sec. 32.6, and the books and recordkeeping requirements in Sec. 32.7.

    ---------------------------------------------------------------------------

    \54\ 40 FR 26504, June 24, 1975. Originally designated as 17 CFR

    30.01, the provision was re-designated as Sec. 32.9 and

    incorporated into the original part 32 regulations adopted on

    November 24, 1976.

    \55\ See discussion and review of original part 32 below.

    \56\ Exchange-traded options on futures were not affected since

    they were not available at the time and only later became available

    when the Commission initiated a pilot program to allow exchange-

    traded options on futures in 1981. See 46 FR 54500, Nov. 3, 1981.

    \57\ See 43 FR 16153, Apr. 17, 1978.

    \58\ Dealer options, which were also being traded at the time,

    were also subsequently exempted from the general options ban. See 43

    FR 23704, June 1, 1978. Dealer options are discussed below in

    connection with the withdrawal of rule 32.12.

    \59\ See 47 FR at 57016, Dec. 22, 1982.

    \60\ See 52 FR at 29003, Aug. 5, 1987.

    ---------------------------------------------------------------------------

    ii. Original Part 32 (Sec. Sec. 32.1-32.10)

    Original part 32 was adopted by the Commission on November 24,

    1976, and included substantially the same provisions as they exist in

    current Sec. Sec. 32.1-32.10.\61\

    ---------------------------------------------------------------------------

    \61\ See 43 FR 51808, Nov. 24, 1976.

    ---------------------------------------------------------------------------

    a. 32.1

    The definitions section, Sec. 32.1, has been substantively

    modified only once \62\ since its adoption in 1976. That revision added

    a scope provision as Sec. 32.1(a). The purpose of adding the scope

    provision was to make clear that part 32 applied only to off-exchange

    bilateral options, and that it would not apply to commodity options

    conducted on or subject to the rules of a contract market. The Sec.

    32.1(a) scope provision was amended once in 1987 to also exclude from

    part 32 commodity options conducted on or subject to the rules of a

    foreign board of trade.\63\ Beyond that, Sec. 32.1 has not been

    substantively amended since its adoption in 1976.

    ---------------------------------------------------------------------------

    \62\ See 47 FR at 57016, Dec. 22, 1982.

    \63\ See 52 FR at 29003, Aug. 5, 1987.

    ---------------------------------------------------------------------------

    Because commodity options (other than options on futures) are now

    swaps and will be authorized to transact subject to the swaps rules,

    the scope provision in Sec. 32.1 has been updated and retained in

    revised part 32 as appropriate. The proposal would delete the

    definitions in current Sec. 32.1 as duplicative--the terms therein are

    already defined elsewhere, either in other Commission regulations or in

    the CEA, and there is no need for their repetition in part 32.

    b. 32.2

    As originally adopted, Sec. 32.2(a) prohibited commodity options

    transactions on a list of enumerated

    [[Page 6102]]

    agricultural commodities and Sec. 32.2(b) prohibited commodity options

    involving any contract of sale of any commodity for future delivery

    traded on or subject to the rules of any contract market or involving

    the prices of such contracts, unless done pursuant to a subsequent

    Commission rulemaking. Section 32.2 was amended once in 1992 to remove

    Sec. 32.2(b),\64\ and Sec. 32.2 was amended again in 1998 to

    reference the Commission's newly adopted Agricultural Trade Option

    rules in Sec. 32.13. Because this proposal would treat agricultural

    swaps the same as swaps in any other commodity, and because all

    commodity options (other than options on futures) are now swaps, it is

    no longer necessary to distinguish between agricultural and non-

    agricultural commodities for the purposes of the Commission's options

    regulations, and thus the Commission is proposing to withdraw Sec.

    32.2.

    ---------------------------------------------------------------------------

    \64\ See 57 FR 27925, June 23, 1992. At that time, original

    Sec. 32.2(a) was re-designated as simply Sec. 32.2.

    ---------------------------------------------------------------------------

    c. 32.3, 32.5, 32.6, and 32.7

    As adopted in 1976, Sec. 32.3 provided that only firms registered

    as futures commission merchants, or registered associated persons of

    such firms, could offer or sell commodity options under part 32.

    Section 32.5 imposed certain disclosure requirements for options

    sellers, Sec. 32.6 addressed segregation of funds, and Sec. 32.7 set

    forth the books and recordkeeping requirements. Because the 1978

    suspension of commodity options in Sec. 32.11 remains in effect, the

    requirements in Sec. Sec. 32.3, 32.5, 32.6, and 32.7 (the ``abandoned

    sections'') are of no practical effect--there are no authorized

    transactions subject to these abandoned sections. The commodity options

    that are allowed to transact outside of the Sec. 32.11 suspension

    (e.g., Sec. 32.4 trade options, Sec. 32.12 dealer options, Sec.

    32.13 agricultural trade options, and commodity option transactions

    conducted on or subject to the rules of a contract market or a foreign

    board of trade) are each exempted from the requirements of the

    abandoned sections. Accordingly, the proposal would withdraw Sec. Sec.

    32.3, 32.5, 32.6, and 32.7.

    d. 32.4

    From its adoption, part 32 has included, in Sec. 32.4, an

    exemption for commodity options used by commercial entities entering

    into the commodity option transactions solely for purposes related to

    their business.\65\ The so-called ``trade option exemption'' has

    remained unchanged since 1976 and has provided legal certainty for that

    segment of the commodity options market available to commercial end

    users. This notice proposes revising the trade option exemption to

    provide that commodity options may transact subject to the same laws,

    rules, regulations, and orders otherwise applicable to all swaps. The

    rationale for the revision is that the swaps rules already allow for

    the equivalent of a trade option--the Dodd-Frank amendments permit

    bilateral swaps, where both parties are ECPs,\66\ to remain uncleared

    at the election of a commercial end user. The primary substantive

    change to this market will be that, while current Sec. 32.4 imposes no

    minimum net worth requirement on participants, both purchasers and

    sellers of commodity options under revised Sec. 32.4 will have to

    qualify as ECPs, just as swaps (other than swaps on a DCM) may only be

    entered into by ECPs. The Commission is specifically requesting comment

    as to whether this distinction will significantly affect hedging

    opportunities available to currently active market participants.

    ---------------------------------------------------------------------------

    \65\ Sec. 32.4(a) exempts a commodity option when it is offered

    to ``a producer, processor, or commercial user of, or a merchant

    handling, the commodity which is the subject of the commodity option

    transaction, or the products or by-products thereof, and that such

    producer, processor, commercial user or merchant is offered or

    enters into the commodity option transaction solely for purposes

    related to its business as such.'' See Sec. 32.4(a).

    \66\ See footnote 26, above.

    ---------------------------------------------------------------------------

    e. 32.8 and 32.9

    Sections 32.8 and 32.9 address unlawful representations and fraud

    in connection with commodity option transactions. These two consumer

    protection provisions are important to both the Commission and the

    commodity options markets. Even though commodity options are now swaps,

    subject to the swaps rules and any anti-fraud or other customer

    protection rules otherwise applicable to swaps, the Commission views

    Sec. Sec. 32.8 and 32.9 as important protections for commodity options

    participants. With the exception of a minor revision expanding the

    unlawful representation prohibition of Sec. 32.8(a) to all Commission

    registrants, Sec. Sec. 32.8 and 32.9 will be retained in substantially

    the same form as they currently exist. The retention of Sec. Sec. 32.8

    and 32.9 will not affect the applicability to options of any anti-fraud

    or other similar rule that is applicable to a swap. That is, Sec. Sec.

    32.8 and 32.9 are being retained in addition to any other protections

    provided by the general swaps rules.

    f. 32.10

    Section 32.10 grandfathered commodity options transactions

    occurring prior to the effective adoption of original part 32. Revised

    part 32 would update the current text with a similar grandfather

    provision for existing commodity options transacted pursuant to current

    part 32. Generally, commodity options transacted pursuant to current

    part 32 (and prior to the effective date of any revision to current

    part 32) will remain enforceable upon the adoption of any revision to

    part 32.

    iii. Subsequent Additions to Part 32--Sec. Sec. 32.12 and 32.13

    a. 32.12--Dealer Options

    Section 32.12, commonly known as the dealer options exemption, was

    added to original part 32 on June 1, 1978.\67\ The dealer options rules

    provided an exemption from the Commission's then recently adopted

    options ban at Sec. 32.11 (recall that the Sec. 32.11 options ban was

    originally adopted on April 17, 1978).\68\ Amended two times shortly

    after its adoption--once to adjust a net worth requirement \69\ and

    again to include certain reporting requirements \70\--the Sec. 32.12

    dealer options rules were intended to grandfather the ongoing

    businesses of certain commercial option grantors who, as of May 1,

    1978, were both in the business of granting options on a physical

    commodity and in the business of buying, selling, producing, or

    otherwise utilizing that commodity.

    ---------------------------------------------------------------------------

    \67\ See 43 FR 23704, June 1, 1978.

    \68\ See 43 FR 16153, Apr. 17, 1978.

    \69\ See 43 FR 47492, Oct. 16, 1978.

    \70\ See 43 FR 52467, Nov. 13, 1978.

    ---------------------------------------------------------------------------

    The primary factor in the Commission's determination to withdraw

    Sec. 32.12 at this time is that the dealer option business has

    apparently ceased to exist. Since at least September 11, 2001,\71\ and

    likely for at least another decade before that,\72\ the Commission has

    not received a single report required to be filed by an entity

    transacting dealer options under Sec. 32.12. That observation, in

    conjunction with

    [[Page 6103]]

    the requirement that to rely on Sec. 32.12 a dealer has to have been

    in this business as of May 1, 1978, implies that no entity is legally

    relying on Sec. 32.12 for any currently transacted business activity.

    The Commission is specifically requesting comment as to whether there

    is any reason not to withdraw Sec. 32.12 in its entirety, and whether

    any person, group of persons, or class of transactions is prejudiced or

    otherwise harmed by such action.

    ---------------------------------------------------------------------------

    \71\ September 11, 2001 is, of course, the day that the

    Commission's hard copy records contained in its New York regional

    office in the World Trade Center were lost. The records would have

    included any Sec. 32.12 reports, which were required to be filed

    with and retained at the Commission's New York regional office in

    hard copy form.

    \72\ Interviews of long-serving Commission staff indicate no

    recollections of entities transacting pursuant to the Sec. 32.12

    dealer options exemption for at least the past 20 years. The

    apparent cessation of the dealer options business should not come as

    a surprise. It was widely expected at the time that when exchange-

    traded options became available (which happened starting in 1981)

    the dealer option business would fade away. It appears that this is,

    in fact, what happened.

    ---------------------------------------------------------------------------

    b. 32.13--Agricultural Trade Options

    Section 32.13 and agricultural trade options are described in the

    Background section above. Added to part 32 in 1998,\73\ and amended

    once thereafter,\74\ the ATOM registration regime has been largely

    unused. It has attracted only one registrant, which registrant has

    since withdrawn its registration. However, the exemption for

    agricultural trade options meeting certain conditions as specified in

    Sec. 32.13(g) appears to be widely used. Because the Commission is

    proposing to authorize agricultural swaps in new part 35, and to re-

    authorize commodity options to transact as swaps (with no distinction

    as between agricultural and non-agricultural commodities) in revised

    Sec. 32.4, the Commission is proposing to withdraw Sec. 32.13 in its

    entirety.\75\ The primary effect of the change would be to remove the

    $10 million net worth requirement for parties relying on the Sec.

    32.13(g) exemption for agricultural trade options. Under revised Sec.

    32.4, parties need only qualify as ECPs, which category would include

    certain persons with a net worth of less than $10 million.

    ---------------------------------------------------------------------------

    \73\ See 63 FR 18832, Apr. 16, 1998.

    \74\ See 64 FR 68011, Dec. 6, 1999.

    \75\ In addition, the proposal would withdraw Sec. 3.13 in its

    entirety. Section 3.13 outlines the registration procedures for

    ATOMs, and will become be moot upon the withdrawal of Sec. 32.13.

    ---------------------------------------------------------------------------

    E. Part 33

    As noted above, the Commission is proposing to amend part 33 to

    remove references to options on physical commodities. All options on

    physicals would now be regulated as swaps, leaving only exchange-traded

    options on futures subject to part 33. Treating options on physicals

    that are traded on a DCM as swaps would have little practical effect

    since anyone (including non-ECPs) could continue to trade such

    instruments on a DCM. In addition, qualified persons (ECPs) could trade

    similar options on physical commodities in the non-DCM environment,

    including on SEFs, subject to the same rules as other physical

    commodity swaps.

    V. Findings Pursuant to Section 4(c)

    As noted above, section 723(c)(3)(A) of the Dodd-Frank Act

    prohibits swaps in an agricultural commodity. However, section

    723(c)(3)(B) of the Dodd-Frank Act explicitly provides that the

    Commission may permit swaps in an agricultural commodity pursuant to

    CEA section 4(c), the Commission's general exemptive authority, ``under

    such terms and conditions as the Commission shall prescribe.''

    Accordingly, certain of the amendments proposed herein are proposed for

    adoption pursuant to section 4(c), as amended by the Dodd-Frank Act.

    Section 4(c)(1) of the CEA authorizes the CFTC to exempt any

    transaction or class of transactions from any of the provisions of the

    CEA (subject to exceptions not relevant here) in order to ``promote

    responsible economic or financial innovation and fair competition.''

    \76\ The Commission may grant such an exemption by rule, regulation, or

    order, after notice and opportunity for hearing, and may do so on

    application of any person or on its own initiative. In enacting section

    4(c), Congress noted that the goal of the provision ``is to give the

    Commission a means of providing certainty and stability to existing and

    emerging markets so that financial innovation and market development

    can proceed in an effective and competitive manner.'' \77\

    ---------------------------------------------------------------------------

    \76\ New section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), as

    amended by the Dodd-Frank Act, provides in full that:

    In order to promote responsible economic or financial

    innovation and fair competition, the Commission by rule, regulation,

    or order, after notice and opportunity for hearing, may (on its own

    initiative or on application of any person, including any board of

    trade designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 5 of this Act) exempt any agreement,

    contract, or transaction (or class thereof) that is otherwise

    subject to subsection (a) (including any person or class of persons

    offering, entering into, rendering advice or rendering other

    services with respect to, the agreement, contract, or transaction),

    either unconditionally or on stated terms or conditions or for

    stated periods and either retroactively or prospectively, or both,

    from any of the requirements of subsection (a), or from any other

    provision of this Act (except subparagraphs (C)(ii) and (D) of

    section 2(a)(1), except that--

    (A) unless the Commission is expressly authorized by any

    provision described in this subparagraph to grant exemptions, with

    respect to amendments made by subtitle A of the Wall Street

    Transparency and Accountability Act of 2010--

    (i) with respect to--

    (I) paragraphs (2), (3), (4), (5), and (7), paragraph

    (18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39),

    (41), (42), (46), (47), (48), and (49) of section 1a, and sections

    2(a)(13), (2)(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a),

    5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and

    (II) section 206(e) of the Gramm-Leach-Bliley Act (Pub. L. 106-

    102; 15 U.S.C. 78c note); and

    (ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act; and

    (B) the Commission and the Securities and Exchange Commission

    may by rule, regulation, or order jointly exclude any agreement,

    contract, or transaction from section 2(a)(1)(D)) if the Commissions

    determine that the exemption would be consistent with the public

    interest.

    \77\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

    ---------------------------------------------------------------------------

    In order to analyze the effect of permitting agricultural swaps to

    trade under the same terms and conditions as other swaps, it is

    appropriate to examine some of the major components of the Dodd-Frank

    Act that apply to swaps generally. Section 727 of the Dodd-Frank Act

    adds, among other things, a new CEA section 2(a)(13) that mandates that

    swap transaction and pricing data be made available to the public.

    Section 723(a)(3) of the Dodd-Frank Act adds a new CEA section 2(h)

    that provides that the Commission shall determine which swaps are

    subject to a mandatory clearing requirement. New CEA section 2(h) also

    provides that swaps that are required to be cleared must be executed on

    a DCM or SEF, if a DCM or SEF makes the swap available for trading. As

    noted above, part 35, as it is currently written, does not permit

    clearing of agricultural swaps and does not contemplate any reporting

    of agricultural swaps data.

    Permitting agricultural swaps to trade under the same terms and

    conditions as other swaps should provide greater certainty and

    stability to existing and emerging markets so that financial innovation

    and market development can proceed in an effective and competitive

    manner. Treating all swaps, including agricultural swaps, in a

    consistent manner should provide greater certainty to markets. The

    Dodd-Frank Act reporting and trade execution requirements should lead

    to greater market and price transparency, which may improve market

    competition, innovation, and development. Centralized clearing of

    agricultural swaps by robustly regulated central clearinghouses should

    reduce systemic risk and provide greater certainty and stability to

    markets by reducing counterparty risk.

    The Commission is requesting comment on whether swaps in

    agricultural commodities should be subject to the same legal

    requirements as swaps in other commodities.

    Section 4(c)(2) of the CEA provides: That the Commission may grant

    exemptions only when it determines that the requirements for which an

    exemption is being provided should not be applied to the agreements,

    contracts or transactions at issue; that the exemption is consistent

    with the public

    [[Page 6104]]

    interest and the purposes of the CEA; that the agreements, contracts or

    transactions will be entered into solely between appropriate persons;

    and that the exemption will not have a material adverse effect on the

    ability of the Commission or Commission-regulated markets to discharge

    their regulatory or self-regulatory responsibilities under the CEA.\78\

    ---------------------------------------------------------------------------

    \78\ Section 4(c)(2) of the CEA, 7 U.S.C. 6(c)(2), provides in

    full that:

    The Commission shall not grant any exemption under paragraph

    (1) from any of the requirements of subsection (a) of this section

    unless the Commission determines that--

    (A) The requirement should not be applied to the agreement,

    contract, or transaction for which the exemption is sought and that

    the exemption would be consistent with the public interest and the

    purposes of this Act; and

    (B) The agreement, contract, or transaction--

    (i) Will be entered into solely between appropriate persons;

    and

    (ii) Will not have a material adverse effect on the ability of

    the Commission or any contract market or derivatives transaction

    execution facility to discharge its regulatory or self-regulatory

    duties under this Act.

    ---------------------------------------------------------------------------

    The purposes of the CEA include ``ensur[ing] the financial

    integrity of all transactions subject to this Act and the avoidance of

    systemic risk'' and ``promot[ing] responsible innovation and fair

    competition among boards of trade, other markets and market

    participants.'' \79\ As noted above, centralized clearing of

    agricultural swaps (which is not permitted under the current part 35

    rules) should reduce systemic risk. Also, allowing agricultural swaps

    to trade under the general swaps rules contained in the Dodd-Frank Act

    would allow agricultural swaps to trade on SEFs and DCMs (which is

    prohibited under the current part 35 rules) which may result in

    increased innovation and competition in the agricultural swaps market.

    Reducing systemic risk and increasing innovation and competition by

    permitting agricultural swaps to trade under the same terms and

    conditions as other swaps would be consistent with the purposes listed

    above, the general purposes of the CEA, and the public interest. The

    Commission is requesting comment on this issue.

    ---------------------------------------------------------------------------

    \79\ CEA section 3(b), (7 U.S.C. 5(b)).

    ---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act contains substantial new

    clearing and trade execution requirements for swaps. The clearing

    requirement is designed, among other things, to reduce the counterparty

    risk of a swap, and therefore systemic risk. The swap reporting and

    trade execution requirements should provide additional market

    information to the Commission, the markets, and the public. Thus,

    treating agricultural swaps in the same manner as other swaps may

    enhance the ability of the Commission or Commission-regulated markets

    to discharge their regulatory or self-regulatory responsibilities under

    the CEA.

    Section 4(c)(3) of the CEA includes within the term ``appropriate

    persons'' a number of specified categories of persons, and also in

    subparagraph (K) thereof ``such other persons that the Commission

    determines to be appropriate in light of * * * the applicability of

    appropriate regulatory protections.'' Section 723(a)(2) of the Dodd-

    Frank Act adds, among other things, a new CEA section 2(e) that

    provides: ``It shall be unlawful for any person, other than an eligible

    contract participant, to enter into a swap unless the swap is entered

    into on, or subject to the rules of, a [DCM].'' \80\ In light of the

    comprehensive new regulatory scheme for swaps and the enhancements made

    to the already robust regulatory system concerning DCMs \81\ that are

    contained in the Dodd-Frank Act, the limitation on participation to

    eligible contract participants outside of a DCM, and the ability of

    others to enter into a swap on a DCM, should limit participation to

    appropriate persons. The Commission requests comment on this issue.

    ---------------------------------------------------------------------------

    \80\ New CEA section 2(e), (7 U.S.C. 2(e)).

    \81\ See, for example, new CEA section 5(d) (7 U.S.C. 7(d)) as

    added by section 735(b) of the Dodd-Frank Act and amended CEA

    section 5c (7 U.S.C. 7a-2) as amended by section 745 of the Dodd-

    Frank Act.

    ---------------------------------------------------------------------------

    VI. Request for Comments Regarding the Proposed Rules

    In addition to specifically requesting comment on the foregoing

    questions related to the issuance of a 4(c) order, and the other

    questions set out in the preceding sections of this notice of proposed

    rulemaking, the Commission poses the following questions:

    1. Generally, will the rule changes and amendments proposed herein

    provide an appropriate regulatory framework for the transacting of (a)

    agricultural swaps, and (b) trade options on all commodities?

    2. Does the proposal for new part 35 appropriately address all

    outstanding issues as they relate to the transaction of swaps in an

    agricultural commodity?

    3. Regarding the proposed revisions to part 32, and specifically

    the revised Sec. 32.4 trade option exemption, will such revisions

    significantly affect hedging opportunities available to currently

    active users of the trade options market? In other words, is there any

    reason not to revise Sec. 32.4 as proposed? In particular, are there

    persons who offer or purchase trade options on non-enumerated

    agricultural commodities (e.g., coffee, sugar, cocoa) under current

    Sec. 32.4 who would not qualify as ECPs and would therefore be

    ineligible to participate in such options under revised Sec. 32.4? If

    so, should such participants be excepted from the general requirement

    that all swaps participants must be ECPs unless the transaction takes

    place on a DCM?

    4. Regarding the proposed withdrawal of Sec. 32.12 in its

    entirety, would such action (in conjunction with the adoption of the

    new rules proposed herein) prejudice or otherwise harm any person,

    group of persons, or class of transactions? In other words, is there

    any reason not to withdraw Sec. 32.12 as proposed?

    5. Similarly, and regarding the proposed withdrawal of Sec. 32.13

    (the agricultural trade option provision) in its entirety, would such

    action (in conjunction with the adoption of the new rules proposed

    herein) prejudice or otherwise harm any person, group of persons, or

    class of transactions? In other words, is there any reason not to

    withdraw Sec. 32.13 as proposed?

    6. Do the proposals as they relate to part 33 appropriately limit

    the scope of part 33 to DCM-traded options on futures, leaving DCM-

    traded options on physical commodities subject to part 32?

    7. Do the proposals outlined herein omit or fail to appropriately

    consider any other areas of concern regarding agricultural swaps and

    options in any commodity?

    VII. Related Matters

    A. Cost Benefit Analysis

    Section 15(a) of the CEA \82\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of the rulemaking or to determine

    whether the benefits of the rulemaking outweigh its costs; rather, it

    requires that the Commission ``consider'' the costs and benefits of its

    actions. Section 15(a) further specifies that the costs and benefits

    shall be evaluated in light of five broad areas of market and public

    concern: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness and financial integrity of futures markets;

    (3) price discovery; (4) sound risk management practices; and (5) other

    public interest considerations. The

    [[Page 6105]]

    Commission may in its discretion give greater weight to any one of the

    five enumerated areas and could in its discretion determine that,

    notwithstanding its costs, a particular rule is necessary or

    appropriate to protect the public interest or to effectuate any of the

    provisions or accomplish any of the purposes of the Act.

    ---------------------------------------------------------------------------

    \82\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    i. Summary of proposed requirements. The proposed rule would

    replace the swap exemption in part 35 and the commodity options

    provisions in part 32 with new rules providing, in general, that

    agricultural swaps and options (other than options on futures) would be

    treated the same as all other swaps. The proposed rule would also amend

    part 33 to remove references to options on physical commodities. While

    the proposed rule does not contain the substantive requirements that

    govern swaps generally (those requirements are found in the swaps-

    related rulemakings that implement the Dodd-Frank Act), for purposes of

    this analysis, it is appropriate to consider the costs and benefits of

    treating agricultural swaps and options as all other swaps are treated.

    ii. Costs. With respect to costs, the Commission has determined

    that allowing agricultural swaps to continue to trade under the

    requirements of the current part 35 would result in substantial costs.

    The Dodd-Frank Act added numerous provisions to the CEA to protect

    market participants and the public, such as the segregation of funds

    for uncleared swaps, swap dealer registration and regulation, including

    business conduct standards, and limitations on conflicts of interest.

    Current part 35 exempts qualifying swaps from nearly all sections of

    the CEA, so that these and other protections contained in Dodd-Frank

    would not apply to agricultural swaps entered into under part 35.

    The Dodd-Frank Act contains numerous provisions designed to improve

    price discovery and foster sound risk management practices, such as the

    provisions encouraging the clearing of swaps and trading of swaps on

    DCMs and SEFs. Current part 35, by its terms, would not allow for the

    clearing or trade execution provisions contained in Dodd-Frank.

    Other alternatives to current part 35 could include writing a new

    part that made agricultural swaps subject to some of the provisions

    contained in the Dodd-Frank Act, but not other provisions, or accepting

    all of the provisions of Dodd-Frank and adding additional requirements.

    The costs of either of these alternatives (and of retaining current

    part 35, as well) would be to the efficiency of markets, of swap

    participants, and of the Commission. Since many users of agricultural

    swaps would likely engage in other types of swaps also, those users

    would be subject to two regulatory regimes and the compliance costs

    that would accompany following both regimes. Moreover, the Commission

    would be required to develop and implement two regimes. Also, several

    of those who commented regarding the ANPRM noted that the new Dodd-

    Frank Act regulatory regime is robust and comprehensive and provides

    significant protections to market participants, so that any concerns

    regarding agricultural swaps that may have existed under the provisions

    of the CFMA should be allayed. Several commenters noted that

    agricultural swaps are important risk management tools and that such

    swaps should be available on the same terms and conditions as other

    swaps that are used to manage risk.

    With respect to options generally, the Commission has determined

    that retaining the current parts 32 and 33 would have substantial

    costs. As noted above, new CEA Sec. 1a(47) defines swaps to include

    options, other than options on futures. The options rules contained in

    part 32 are a confusing tangle of largely obsolete rules and, even more

    important, the general option rules in parts 32 and 33 do not conform

    to the requirements in the Dodd-Frank Act.

    iii. Benefits. With respect to benefits, the Commission has

    determined that replacing parts 32 and 35 with rules that allow

    agricultural swaps and options to trade under the same terms and

    conditions as other swaps and amending part 33 to delete references to

    options on physical commodities will have substantial benefits.

    Treating agricultural swaps the same as other swaps would subject

    those swaps to the numerous provisions in the Dodd-Frank Act that

    protect market participants and the public, such as the segregation of

    funds for uncleared swaps, limitations on conflicts of interest, and

    swap dealer registration and regulation, including business conduct

    standards. Moreover, the clearing requirement in the Dodd-Frank Act is

    intended to reduce systemic risk which should further protect the

    public.

    The provisions in the Dodd-Frank Act encouraging the clearing of

    swaps and trading of swaps on DCMs and SEFs should improve price

    discovery and foster sound risk management practices. The current

    provisions of part 35 do not permit such clearing or trade execution.

    The Dodd-Frank Act mandates that swap transaction and pricing data

    be made available to the public. The reporting and trade execution

    requirements should lead to greater market and price transparency.

    Also, having a single set of regulations governing all swap

    transactions should improve efficiency and compliance costs for markets

    and market participants.

    With respect to options generally, the Commission has determined

    that replacing part 32 and allowing options (other than options on

    futures) to trade in the same manner as other swaps will have

    substantial benefits similar to those for agricultural swaps discussed

    above. Moreover, the current part 32 is outdated and largely obsolete

    under its own terms. Finally, the current language of parts 32 and 33

    regarding options generally does not comply with the swap provisions of

    the Dodd-Frank Act and must be replaced.

    iv. Conclusion. After considering the section 15(a) factors, the

    Commission has determined that the benefits of the proposed parts 32

    and 35, and the amendments to part 33, outweigh the costs. Accordingly,

    the Commission has determined to propose parts 32 and 35, and the

    amendments to part 33. The Commission invites public comment on its

    cost-benefit considerations. Commenters are also invited to submit any

    data or other information that they may have quantifying or qualifying

    the costs and benefits of the Proposal with their comment letters.

    B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact.\83\

    The proposed rule, in replacing part 35, would affect eligible swap

    participants (``ESPs'') (by eliminating the ESP category and requiring

    agricultural swap participants to be eligible contract participants

    (``ECPs''), unless the transaction occurs on a designated contract

    market (``DCM'')). Regarding options, the proposed rule, in amending

    part 33, would affect entities that currently engage in options on

    physical commodities on a DCM, and, in replacing part 32, would affect

    those entities that currently engage in options under Sec. 32.4 and

    Sec. 32.13(g). By mandating that agricultural swaps and options be

    treated as all other swaps, the effect of the proposed rule has the

    potential to affect DCMs, derivatives

    [[Page 6106]]

    clearing organizations (``DCOs''), futures commission merchants

    (``FCMs''), large traders and ECPs, as well as swap dealers (``SDs''),

    major swap participants (``MSPs''), commodity pool operators

    (``CPOs''), swap execution facilities (``SEFs''), and swap data

    repositories (``SDRs'').

    ---------------------------------------------------------------------------

    \83\ 5 U.S.C. 601 et seq.

    ---------------------------------------------------------------------------

    i. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESPs. The

    Commission has previously determined that DCMs, DCOs, FCMs, CPOs, large

    traders, ECPs, and ESPs are not small entities for purposes of the

    Regulatory Flexibility Act.\84\ Accordingly, the Chairman, on behalf of

    the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the

    proposed rules will not have a significant economic impact on a

    substantial number of small entities with respect to these entities.

    ---------------------------------------------------------------------------

    \84\ See, respectively and as indicated, 47 FR 18618, 18619,

    Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); 66 FR 45604, at

    45609, Aug. 29, 2001 (DCOs); 66 FR 20740, 20743, Apr. 25, 2001

    (ECPs); and 57 FR 53627, 53630, Nov. 12, 1992 and 58 FR 5587, 5593,

    Jan. 22, 1993 (ESPs).

    ---------------------------------------------------------------------------

    ii. SDs, MSPs, SEFs, and SDRs. SDs, MSPs, SEFs, and SDRs are new

    categories of registrant under the Dodd-Frank Act. Therefore, the

    Commission has not previously addressed the question of whether SDs,

    MSPs, SEFs, and SDRs are, in fact, ``small entities'' for purposes of

    the RFA. For the reasons that follow, the Commission is hereby

    determining that none of these entities would be small entities.

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the proposed rules, with

    respect to SDs, MSPs, SEFs, and SDRs, will not have a significant

    impact on a substantial number of small entities.

    a. SDs: As noted above, the Commission previously has determined

    that FCMs are not small entities for the purpose of the RFA based upon,

    among other things, the requirements that FCMs meet certain minimum

    financial requirements that enhance the protection of customers'

    segregated funds and protect the financial condition of FCMs

    generally.\85\ SDs similarly will be subject to minimum capital and

    margin requirements, and are expected to comprise the largest global

    financial firms. Entities that engage in a de minimis quantity of swap

    dealing in connection with transactions with or on behalf of its

    customers will be exempted from designation as an SD. For purposes of

    the RFA in this proposed rulemaking, the Commission is hereby

    determining that SDs not be considered to be ``small entities'' for

    essentially the same reasons that FCMs have previously been determined

    not to be small entities.

    ---------------------------------------------------------------------------

    \85\ 47 FR, at 18619.

    ---------------------------------------------------------------------------

    b. MSPs: The Commission also has determined that large traders are

    not small entities for the purpose of the RFA.\86\ The Commission

    considered the size of a trader's position to be the only appropriate

    test for purposes of large trader reporting.\87\ MSPs, among other

    things, maintain substantial positions in swaps, creating substantial

    counterparty exposure that could have serious adverse effects on the

    financial stability of the United States banking system or financial

    markets. For purposes of the RFA, the Commission is hereby determining

    that MSPs not be considered to be ``small entities'' for essentially

    the same reasons that large traders have previously been determined not

    to be small entities.

    ---------------------------------------------------------------------------

    \86\ Id. at 18620.

    \87\ Id.

    ---------------------------------------------------------------------------

    c. SEFs: The Dodd-Frank Act defines a SEF to mean a trading system

    or platform in which multiple participants have the ability to accept

    bids and offers made by multiple participants in the facility or

    system, through any means of interstate commerce, including any trading

    facility that facilitates the execution of swaps between persons and is

    not a DCM. The Commission previously determined that a DCM is not a

    small entity because, among other things, it may only be designated

    when it meets specific criteria, including expenditure of sufficient

    resources to establish and maintain adequate self-regulatory programs.

    Likewise, the Commission will register an entity as a SEF only after it

    has met specific criteria, including the expenditure of sufficient

    resources to establish and maintain an adequate self-regulatory

    program. Accordingly, as with DCMs, the Commission is hereby

    determining that SEFs are not ``small entities'' for purposes of the

    RFA.

    d. SDRs: The Commission previously determined DCMs and DCOs not to

    be small entities because of ``the central role'' they play in ``the

    regulatory scheme concerning futures trading.'' \88\ Because of the

    ``importance of futures trading in the national economy,'' to be

    designated as a contract market or registered as a DCO, the respective

    entity must meet stringent requirements set forth in the CEA.\89\

    Similarly, swap transactions that are reported and disseminated by SDRs

    are an important part of the national economy. SDRs will receive data

    from market participants and will be obligated to facilitate swaps

    execution by reporting real-time data.\90\ Similar to DCOs and DCMs,

    SDRs will play a central role both in the regulatory scheme covering

    swaps trading and in the overall market for swap transactions.

    Additionally, the Dodd-Frank Act allows DCOs to register as SDRs.

    Accordingly, for essentially the same reasons that DCOs and DCMs have

    previously been determined not to be small entities, the Commission is

    hereby determining that SDRs are not ``small entities'' for purposes of

    the RFA.

    ---------------------------------------------------------------------------

    \88\ 47 FR at 18619 (DCMs) and 66 FR at 45609 (DCOs).

    \89\ See new CEA section 5(d), as added by section 735(b) of the

    Dodd-Frank Act regarding DCM core principles and new CEA section

    5b(c)(2), as added by section 725(c) of the Dodd-Frank Act regarding

    DCO core principles.

    \90\ See new CEA section 21, as added by section 728 of the

    Dodd-Frank Act.

    ---------------------------------------------------------------------------

    iii. Entities Eligible to Engage in Options on Physical Commodities

    on DCMs under Part 33. Under the current part 33, there is no

    regulatory financial threshold that must be met in order to engage in

    options on physical commodities on a DCM, so small entities would be

    eligible to engage in such transactions. In fact, there is no

    regulatory financial threshold that must be met in order to engage in

    any type of transaction on a DCM. As noted above, new CEA section

    1a(47) provides that options are swaps, other than options on futures.

    New CEA section 2(e) provides that non-ECPs may enter into swaps, if

    the swaps are effected on a DCM. Therefore, even though an option on a

    physical commodity is defined to be a swap under the Dodd-Frank Act,

    small entities will continue to be eligible to enter into such options

    on a DCM under the rules proposed herein, just as they are eligible to

    enter into such options on a DCM under the current part 33. Thus, the

    rule will have no effect on the eligibility of small entities to enter

    into an option on a physical commodity on a DCM. Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the proposed rules will not have a significant

    economic impact on a substantial number of small entities with respect

    to entities eligible to engage in options on physical commodities on

    DCMs under part 33.

    iv. Entities Engaged in Options under Sec. 32.13(g). The

    Commission has not previously addressed the question of whether

    entities engaged in agricultural trade options under Sec. 32.13(g)

    are, in fact, ``small entities'' for purposes of the RFA. For the

    reasoning that follows, the Commission is hereby determining that

    entities engaged in options under Sec. 32.13(g) would not be small

    entities.

    As noted above, the Commission previously has determined that ECPs

    are

    [[Page 6107]]

    not small entities for the purpose of the RFA based upon, among other

    things, the financial and institutional requirements contained in the

    definition. Also as noted above, the exemption at Sec. 32.13(g) allows

    for options on the enumerated agricultural commodities to be sold when:

    (1) The option is offered to a commercial (``a producer, processor, or

    commercial user of, or a merchant handling'' the underlying commodity);

    (2) the commercial enters the transaction solely for purposes related

    to its business as such; and (3) each party to the option contract has

    a net worth of not less than $10 million. There are two analogous

    provisions in the ECP definition, new CEA sections 1a(18)(A)(v)(III)

    and 1a(18)(A)(xi)(II). New CEA section 1a(18)(A)(v)(III) provides that

    an ECP includes a corporation, partnership, proprietorship,

    organization, trust, or other entity that has a net worth exceeding

    $1,000,000 and enters into a swap in connection with the entity's

    business or to manage the risk associated with an asset or liability

    owned or incurred or reasonably likely to be owned or incurred by the

    entity in the conduct of the entity's business. New CEA section

    1a(18)(A)(xi)(II) provides that an ECP includes an individual who has

    assets invested on a discretionary basis, the aggregate of which is in

    excess of $5,000,000 and who enters the swap in order to manage the

    risk associated with an asset owned or liability incurred, or

    reasonably likely to be owned or incurred, by the individual. The

    participation requirements of Sec. 32.13(g)(1) are similar to, if not

    more restrictive than, the analogous ECP provisions.

    For purposes of the RFA in this proposed rulemaking, the Commission

    is hereby determining that entities engaged in options under Sec.

    32.13(g) not be considered to be ``small entities'' for essentially the

    same reasons that ECPs have previously been determined not to be small

    entities. Accordingly, the Chairman, on behalf of the Commission,

    hereby certifies pursuant to 5 U.S.C. 605(b) that the proposed rules,

    with respect to entities engaged in options under Sec. 32.13(g), will

    not have a significant impact on a substantial number of small

    entities.

    v. Entities Engaged in Options under Sec. 32.4. The Commission has

    not previously addressed the question of whether entities engaged in

    trade options under Sec. 32.4 are, in fact, ``small entities'' for

    purposes of the RFA. As noted above, under Sec. 32.4, an option must

    be offered to a producer, processor, or commercial user of, or a

    merchant handling, the commodity, who enters into the commodity option

    transaction solely for purposes related to its business as such. The

    Sec. 32.4 trade option exemption does not include any net worth

    requirement.

    Because there is no net worth requirement in Sec. 32.4, thus

    allowing commercial entities of any economic status to effect option

    transactions, the Commission is not in a position to determine whether

    entities engaged in options under Sec. 32.4 include a substantial

    number of small entities on which the proposed rule would have a

    significant economic impact. Therefore, the Commission offers, pursuant

    to 5 U.S.C. 603, the following initial regulatory flexibility analysis,

    which it shall transmit to the Chief Counsel for Advocacy of the Small

    Business Administration as Sec. 603 requires:

    A description of the reasons why action by the agency is

    being considered. The Commission is taking this regulatory action to

    withdraw Sec. 32.4 because the Dodd-Frank Act has defined the term

    ``swap'' to include options. This new definition renders Sec. 32.4

    obsolete in its current form.

    A succinct statement of the objectives of, and legal basis

    for, the proposed rule. The objective of the withdrawal of Sec. 32.4

    is to make the Commission's regulations comport with the CEA as revised

    by the Dodd-Frank Act. As stated previously, the legal basis for the

    proposed withdrawal is the new CEA definition of swap, new section

    1a(47)(A)(i), and the agricultural swaps provisions in section

    723(c)(3) of the Dodd-Frank Act.

    A description of and, where feasible, an estimate of the

    number of small entities to which the proposed rule will apply. The

    small entities to which the proposed withdrawal of Sec. 32.4 may apply

    are those commercial small entities that would be smaller than an ECP

    and additionally would have annual receipts of less than $750,000, the

    threshold for the definition of small entity in the RFA.\91\ Because

    there are no reporting or registration requirements in Sec. 32.4, it

    is difficult to quantify the exact number of small entities, if any, to

    which the proposed rule may apply.

    ---------------------------------------------------------------------------

    \91\ 5 U.S.C. 601(6).

    ---------------------------------------------------------------------------

    A description of the projected reporting, recordkeeping,

    and other compliance requirements of the proposed rule, including an

    estimate of the classes of small entities which will be subject to the

    requirement and the type of professional skills necessary for

    preparation of the report or record. The proposed withdrawal of Sec.

    32.4 does not contain any reporting, recordkeeping, or other compliance

    requirements. However, because the Dodd-Frank Act provides that options

    are swaps, the swaps rules being promulgated under the Dodd-Frank Act

    in other rulemakings will contain reporting, recordkeeping, and other

    compliance requirements. However, the withdrawal of 32.4 and the

    application of the Dodd-Frank Act swaps rules will limit option

    transactions to eligible contract participants, which have been

    determined not to be small entities. Therefore, any entity that is not

    an ECP will be unable to enter into option transactions except on a

    DCM. Thus, there will be no reporting, recordkeeping or compliance

    requirements applicable to any small entity.

    An identification, to the extent practicable, of all

    relevant Federal rules which may duplicate, overlap or conflict with

    the proposed rule. Small entities that do not qualify as ECPs will be

    unable to engage in options transactions except on a DCM under an

    existing regulatory scheme. Accordingly, there will be no rules

    applicable to them that could duplicate, overlap, or conflict with any

    other Federal rules.

    Description of any significant alternatives to the

    proposed rule which accomplish the stated objectives of applicable

    statutes and which minimize any significant economic impact of the

    proposed rule on small entities. These may include, for example, (1)

    the establishment of differing compliance or reporting requirements or

    timetables that take into account the resources available to small

    entities; (2) the clarification, consolidation, or simplification of

    compliance and reporting requirements under the rule for such small

    entities; (3) the use of performance rather than design standards; and

    (4) an exemption from coverage of the rule, or any part thereof, for

    such small entities.

    A potential alternative to limiting trade options under Sec. 32.4

    to ECPs would be to create a special rule to allow non-ECPs to engage

    in such transactions. However, the vast majority of commenters

    responding to the ANPRM, including both agricultural and non-

    agricultural interests,\92\ supported treating agricultural swaps the

    same as other swaps, which would entail limiting participation in trade

    options (other than options on a DCM) to ECPs.

    ---------------------------------------------------------------------------

    \92\ See summary of comments at III B above.

    ---------------------------------------------------------------------------

    Given these facts, the Commission has determined to treat all trade

    options in the same manner as any other swap and

    [[Page 6108]]

    thus limit participation to ECPs, unless the swap is transacted on a

    DCM.

    C. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA),\93\ an agency may not

    conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number from the Office of Management and Budget (OMB). The Commission

    believes that these proposed rules will not impose any new information

    collection requirements that require approval of OMB under the PRA. The

    Commission notes that these proposed rules will involve the withdrawal

    of certain provisions related to Commission forms, and will ultimately

    result in the expiration, cancellation, or removal of such forms.\94\

    Because the proposals would ultimately result in removing or deleting

    form filing and/or recordkeeping burdens, it will not result in the

    creation of any new information collection subject to OMB review or

    approval under the PRA.

    ---------------------------------------------------------------------------

    \93\ 44 U.S.C. 3501 et seq.

    \94\ The affected forms include any forms that relate to the

    agricultural trade option rules in current 17 CFR 32.13 and the

    dealer option rules in current 17 CFR 32.12.

    ---------------------------------------------------------------------------

    As a general matter, these proposed rules would allow agricultural

    swaps and options to trade under the same terms and conditions as all

    other swaps and these proposed rules do not, by themselves, impose any

    new information collection requirements. Collections of information

    that may be associated with engaging in agricultural swaps or options

    are, or will be, addressed within each of the general swap-related

    rulemakings implementing the Dodd-Frank Act. The Commission invites

    public comment on the accuracy of its estimate that no additional

    information collection requirements or changes to existing collection

    requirements would result from the rules proposed herein.

    VIII. Proposed Rules

    List of Subjects

    17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures,

    Reporting and recordkeeping requirements.

    17 CFR Part 32

    Commodity futures, Consumer protection, Fraud, Reporting and

    recordkeeping requirements.

    17 CFR Part 33

    Commodity futures, Consumer protection, Fraud, Reporting and

    recordkeeping requirements.

    17 CFR Part 35

    Commodity futures.

    In consideration of the foregoing and pursuant to the authority

    contained in the Act, as indicated herein, the Commission hereby

    proposes to amend chapter I of title 17 of the Code of Federal

    Regulations as follows:

    PART 3--REGISTRATION

    1. The authority citation for part 3 continues to read as follows:

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,

    6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b,

    13c, 16a, 18, 19, 21, 23.

    Sec. 3.13 [Removed and Reserved]

    2. Remove and reserve Sec. 3.13.

    3. Revise part 32 to read as follows:

    PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

    Sec.

    32.1 Scope.

    32.2 [Reserved.]

    32.3 [Reserved.]

    32.4 Commodity option transactions; general authorization.

    32.5 [Reserved.]

    32.6 [Reserved.]

    32.7 [Reserved.]

    32.8 Unlawful representations; execution of orders.

    32.9 Fraud in connection with commodity option transactions.

    32.10 Option transactions entered into prior to the effective date

    of this part.

    32.11 [Reserved.]

    32.12 [Reserved.]

    32.13 [Reserved.]

    Authority: 7 U.S.C. 1a, 2 note, 6c(b), and 6(c), unless

    otherwise noted.

    Sec. 32.1 Scope.

    The provisions of this part shall apply to all commodity option

    transactions, except for commodity option transactions on a contract of

    sale of a commodity for future delivery conducted or executed on or

    subject to the rules of either a designated contract market or a

    foreign board of trade.

    Sec. 32.2 [Reserved]

    Sec. 32.3 [Reserved]

    Sec. 32.4 Commodity option transactions; general authorization.

    Subject to the provisions of this part, any person or group of

    persons may offer to enter into, enter into, confirm the execution of,

    maintain a position in, or otherwise conduct activity related to any

    transaction in interstate commerce that is a commodity option

    transaction, subject to all provisions of the Act, including any

    Commission rule, regulation, or order thereunder, otherwise applicable

    to any other swap.

    Sec. 32.5 [Reserved]

    Sec. 32.6 [Reserved]

    Sec. 32.7 [Reserved]

    Sec. 32.8 Unlawful representations; execution of orders.

    It shall be unlawful for:

    (a) Any person required to be registered with the Commission in

    accordance with the Act expressly or impliedly to represent that the

    Commission, by declaring effective the registration of such person or

    otherwise, has directly or indirectly approved such person, or any

    commodity option transaction solicited or accepted by such person;

    (b) Any person in or in connection with an offer to enter into, the

    entry into, or the confirmation of the execution of, any commodity

    option transaction expressly or impliedly to represent that compliance

    with the provisions of this part constitutes a guarantee of the

    fulfillment of the commodity option transaction;

    (c) Any person, upon receipt of an order for a commodity option

    transaction, unreasonably to fail to secure prompt execution of such

    order.

    Sec. 32.9 Fraud in connection with commodity option transactions.

    It shall be unlawful for any person directly or indirectly:

    (a) To cheat or defraud or attempt to cheat or defraud any other

    person;

    (b) To make or cause to be made to any other person any false

    report or statement thereof or cause to be entered for any person any

    false record thereof; or

    (c) To deceive or attempt to deceive any other person by any means

    whatsoever; in or in connection with an offer to enter into, the entry

    into, or the confirmation of the execution of, any commodity option

    transaction.

    Sec. 32.10 Option transactions entered into prior to [effective date

    of final rule].

    Nothing contained in this part shall be construed to affect any

    lawful activities that occurred prior to [effective date of final

    rule].

    [[Page 6109]]

    Sec. 32.11 [Reserved]

    Sec. 32.12 [Reserved]

    Sec. 32.13 [Reserved]

    PART 33--REGULATION OF COMMODITY OPTION TRANSACTIONS THAT ARE

    OPTIONS ON CONTRACTS OF SALE OF A COMMODITY FOR FUTURE DELIVERY

    4. The authority citation for part 33 is revised to read as

    follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-

    1, 13b, 19, and 21, unless otherwise noted.

    5. Revise the part heading to read as set forth above.

    6. In Sec. 33.2, revise paragraph (b) to read as follows:

    Sec. 33.2 Applicability of Act and rules; scope of part 33.

    * * * * *

    (b) The provisions of this part apply to commodity option

    transactions that are options on contracts of sale of a commodity for

    future delivery except for commodity option transactions that are

    options on contracts of sale of a commodity for future delivery

    conducted or executed on or subject to the rules of a foreign board of

    trade.

    * * * * *

    Sec. 33.4 [Amended]

    7. Amend Sec. 33.4 as follows:

    a. Remove the words ``or for options on physicals in any commodity

    regulated under the Act,'' in the introductory text;

    b. Remove and reserve paragraph (a)(4);

    c. Remove and reserve paragraph (a)(5)(iv);

    d. Remove the words ``or underlying physical'' from paragraph

    (b)(1)(iii); and

    e. Remove the words ``, options on physicals,'' from paragraph

    (d)(3).

    8. Amend Sec. 33.7 as follows:

    a. Revise the second paragraph of the Options Disclosure Statement

    in paragraph (b) introductory text;

    b. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(1) each time it appears;

    c. Remove the phrase ``(e.g., commitment to sell the physical)''

    from paragraph (b)(1) the first time it appears;

    d. Designate the undesignated paragraphs following paragraph (b)(1)

    as paragraphs (b)(1)(i), (ii), (iii), (iv), and (v), and revise newly

    designated paragraph (b)(1)(v);

    e. Remove the phrase ``or physical commodity'' from paragraph

    (b)(2) introductory text and from paragraph (b)(2)(i);

    f. Designate the undesignated paragraphs following paragraph (b)(3)

    as paragraphs (b)(3)(i), (ii), and (iii);

    g. Designate paragraph (b)(4) as paragraph (b)(4)(i) and the

    undesignated paragraph that follows as paragraph (b)(4)(ii);

    h. Designate paragraph (b)(5) as paragraph (b)(5)(i) and the

    undesignated paragraph that follows as paragraph (b)(5)(ii), and remove

    the phrase ``or underlying physical commodity'' from newly designated

    paragraph (b)(5)(i) both times it appears;

    i. Revise newly designated paragraph (b)(5)(ii);

    j. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(6);

    k. Remove the phrase ``or the physical commodity'' and the phrase

    ``or underlying physical commodity'' from paragraph (b)(7)(ii);

    l. Remove and reserve paragraph (b)(7)(iv);

    m. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(7)(v); and

    n. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(7)(x).

    The revisions read as follows:

    Sec. 33.7 Disclosure.

    * * * * *

    (b) * * *

    BOTH THE PURCHASER AND THE GRANTOR SHOULD KNOW THAT THE OPTION IF

    EXERCISED, RESULTS IN THE ESTABLISHMENT OF A FUTURES CONTRACT (AN

    ``OPTION ON A FUTURES CONTRACT'').

    * * * * *

    (1) * * *

    (v) The grantor of a put option on a futures contract who has a

    short position in the underlying futures contract is subject to the

    full risk of a rise in the price in the underlying position reduced by

    the premium received for granting the put. In exchange for the premium

    received for granting a put option on a futures contract, the option

    grantor gives up all of the potential gain resulting from a decrease in

    the price of the underlying futures contract below the option strike

    price upon exercise or expiration of the option.

    (5) * * *

    (ii) Also, an option customer should be aware of the risk that the

    futures price prevailing at the opening of the next trading day may be

    substantially different from the futures price which prevailed when the

    option was exercised.

    * * * * *

    9. Revise part 35 to read as follows:

    PART 35--SWAPS IN AN AGRICULTURAL COMMODITY (AGRICULTURAL SWAPS)

    Authority: 7 U.S.C. 2 note, 6c(b), and 6(c), unless otherwise

    noted.

    Sec. 35.1 Agricultural swaps, generally.

    (a) Any person or group of persons may offer to enter into, enter

    into, confirm the execution of, maintain a position in, or otherwise

    conduct activity related to, any transaction in interstate commerce

    that is a swap in an agricultural commodity subject to all provisions

    of the Act, including any Commission rule, regulation, or order

    thereunder, otherwise applicable to any other swap; and

    (b) In addition to paragraph (a) of this section, any transaction

    in interstate commerce that is a swap in an agricultural commodity may

    be transacted on a swap execution facility, designated contract market,

    or otherwise in accordance with all provisions of the Act, including

    any Commission rule, regulation, or order thereunder, applicable to any

    other swap eligible to be transacted on a swap execution facility,

    designated contract market, or otherwise.

    Issued in Washington, DC on January 20, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Commodity Options and Agricultural Swaps--Commission

    Voting Summary and Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations.

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to authorize agricultural swap

    and commodity option transactions and subject them to the same rules

    applicable to all other swaps. The Dodd-Frank Act prohibits such

    transactions if the Commission does not specifically authorize them.

    The Commission was informed on this proposal by the public comments

    received in response to an advanced notice of proposed rulemaking

    published in September of last year that addressed agricultural

    swaps. Those comments overwhelmingly supported treating agricultural

    swaps similarly to the treatment of other swaps brought under

    [[Page 6110]]

    regulation by the Dodd-Frank Act. Agricultural producers, packers,

    processers and handlers will benefit from the ability to use

    agricultural swaps to hedge their risk and also will benefit from

    the transparency brought forth under the Dodd-Frank Act. I believe

    this proposed rulemaking provides an appropriate regulatory

    framework for the transaction of agricultural swaps and commodity

    options, and I look forward to hearing the public's views on this

    matter.

    [FR Doc. 2011-1685 Filed 2-2-11; 8:45 am]

    BILLING CODE P

    Last Updated: February 3, 2011